Fed officials diverge on treatment for economy

By IBT Staff Reporter On 08/30/11 AT 1:48 PM

Two top Federal Reserve officials diverged on Tuesday on the need for further action by the central bank to stimulate the flagging economic recovery, underscoring the dilemma faced by Fed Chairman Ben Bernanke.

Charles Evans, president of the Chicago Federal Reserve Bank and a noted policy dove, said he favored strong central bank accommodation for a substantial period of time, since the economy now looks to be moving sideways.

But Naryana Kocherlakota, president of the Minneapolis Federal Reserve Bank, speaking separately on Tuesday, stopped well short of signaling support for further easing, showing he remains firmly on the hawkish wing of the Fed's policy-setting panel.

Markets are primed for the Fed's next policy meeting on September 20-21, and Evans' comments on CNBC television on Tuesday fueled expectations that the Fed could build on its series of unprecedented moves to prop up the U.S. economy, spurring a rally in U.S. Treasuries and gold futures.

The remarks by the two policy makers come on the heels of Fed's annual conference in Jackson Hole, Wyoming, where Bernanke on Friday stopped short of detailing further action by the central bank.

But Bernanke -- who said on Friday that the Fed was prepared to do more to foster a stronger recovery -- is also under pressure to cease the monetary easing that some worry has gone too far over the last few years with too little effect.

Evans told CNBC television he backs some of the most aggressive policy actions now being considered by the Fed, adding the labor market, with its 9.1 percent jobless rate, looks to be in a recession.

The U.S. central bank, which has already cut short-term interest rates to near zero and bought $2.3 trillion in long-term securities to boost the recovery, said on August 9 that it would likely keep rates exceptionally low for at least the next two years. The decision drew dissents from Kocherlakota and two others, the most in nearly 20 years.

But Kocherlakota on Tuesday indicated he would support the decision now that it has been made.

I plan to abide by the August 2011 commitment in thinking about my own future decisions, Kocherlakota told the National Association of State Treasurers in Bismarck, North Dakota.

I believe that undoing this commitment in the near term would undercut the ability ... to offer similar conditional commitments in the future, and this ability has certainly proved very useful in the past three years, he added.

Kocherlakota's remarks indicated that possible further easing would be a hard sell for him, unless inflation dropped sharply.

Minutes from the Fed's August 9 gathering, to be released at 2 p.m. (1800 GMT) on Tuesday, could shed light on whether support is building for further steps to aid the economy.

DARK CLOUDS

The U.S. economy grew at a 1 percent annual rate in the second quarter after expanding at only a 0.4 percent pace during the first three months of the year, raising fears about the solidity of the recovery.

The latest dark sign for the economy came on Tuesday when data showed confidence among U.S. consumers plunged in August to its lowest level in more than two years.

Kocherlakota noted that inflation and inflation expectations are higher, and unemployment lower -- and expected to drop further -- than last November when the Fed embarked on its most recent round of monetary stimulus.

Some investors have speculated that signs of economic weakness could prompt a third round of bond buying by the Fed, but such a move would likely meet political opposition both domestically and abroad.

Many analysts see more modest steps as likelier, such as reinvesting the Fed's securities holdings into longer-term maturities.

(Reporting by Jonathan Spicer and Leah Schnurr in New York, and Ann Saphir in Bismarck, North Dakota; Editing by Leslie Adler)